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STOCKHOLM, Oct 10: Three Americans shared the 2001 Nobel economics prize on Wednesday for explaining why many people distrust used car salesmen and governments doubt the accuracy of citizens’ income tax forms.
The Royal Swedish Academy of Sciences rewarded economics professors George Akerlof, Michael Spence and Joseph Stiglitz for their analyses of how markets function when some people know more than others — a concept called asymmetric information.
The term means, for example, that the managers and board members of a corporation know more than shareholders about that corporation’s profitability, just as borrowers know more than lenders about their debt repayment prospects.
“During the 1970s, this year’s laureates laid the foundation for a general theory of markets with asymmetric information,” the academy said in its citation.
The trio’s contributions “form the core of modern information economics” and have led to practical applications in areas ranging from traditional agricultural markets to modern financial markets, the academy said.
What the winners’ work boiled down to, said Anders Borglin, economics professor at Lund University in southern Sweden, was the theory behind many people’s instinctive distrust of used car salesmen, who usually know more than buyers about the vehicles.
“In the same way citizens know more about their private finances than the tax authorities, this is asymmetric information,” Borglin told Reuters.
Akerlof, 61, an economics professor at University of California at Berkeley, said he was “just totally thrilled and unbelievably surprised” at the news, which caught him asleep. “My family is equally thrilled and surprised.”
Spence, 58, is a former dean of Harvard and Stanford universities, and Stiglitz is a professor of economics, business and international affairs at Columbia University.
ECONOMICS TOOLBOX: A field close to the 2001 laureates’ area of expertise was last recognised by the Nobel academy in 1996, when James Mirrlees and William Vickrey of Britain won the prestigious $1 million prize.
In what his peers have described as ground-breaking work, Akerlof showed that asymmetric information can give rise to so-called adverse selection on markets.
One practical example was how sellers of low-quality used cars might crowd everyone else out of the market.
Spence took this forward by showing how better informed individuals can credibly transmit their knowledge to those less well informed to avoid some problems associated with adverse selection.
His work on employers’ differing expectations on different groups of workers helped explain why men and white people earn higher wages than women and blacks with the same productivity.—Reuters
